19. THE INSULAR LIFE ASSURANCE COMPANY, LTD., Petitioner, vs. PAZ Y. KHU, FELIPE Y.

KHU, JR., and FREDERICK Y. KHU, Respondents.

Facts: In 1997, Felipe N. Khu, Sr. (Felipe) applied for a life insurance policy with Insular Life under the latter’s
Diamond Jubilee Insurance Plan. Felipe accomplished the required medical questionnaire wherein he did not
declare any illness or adverse medical condition. Insular Life thereafter issued him Policy Number with a face
value of P1 million. This took effect on June 22, 1997.

In 1999, Felipe’s policy lapsed due to non-payment of the premium covering the period from June 22,
1999 to June 23, 2000.

On September 7, 1999, Felipe applied for the reinstatement of his policy and paid the premium. Except
for the change in his occupation(self employed-mayor), all the other information submitted by Felipe in his
application for reinstatement was the same.

On October 12, 1999, Insular Life advised Felipe that his application for reinstatement may only be
considered if he agreed to certain conditions such as payment of additional premium and the cancellation of the
riders pertaining to premium waiver and accidental death benefits. Felipe agreed to these conditions and paid
the agreed additional premium. An endorsement was later on issued by the petitioner.

After making 2 consecutive payments (2000-2001; 2001-2002), on September 22, 2001, Felipe died. His
Certificate of Death enumerated the following as causes of death:

Immediate cause: a. End stage renal failure, Hepatic failure

Antecedent cause: b. Congestive heart failure, Diffuse myocardial ischemia.
Underlying cause: c. Diabetes Neuropathy, Alcoholism, and Pneumonia.

On October 5, 2001, the beneficiaries of Felipe or the respondents filed with Insular Life a claim for
benefit under the reinstated policy. This claim was denied. Instead, Insular Life advised Felipe’s beneficiaries
that it had decided to rescind the reinstated policy on the grounds of concealment and misrepresentation by
Felipe.

Hence, respondents instituted a complaint for specific performance with damages. Respondents prayed
that the reinstated life insurance policy be declared valid, enforceable and binding on Insular Life; and that the
latter be ordered to pay unto Felipe’s beneficiaries the proceeds of this policy.

Insular Life countered that Felipe did not disclose the ailments that he already had prior to his
application for reinstatement of his insurance policy; and that it would not have reinstated the insurance policy
had Felipe disclosed the material information on his adverse health condition. It contended that when Felipe
died, the policy was still contestable.

RTC favoured the respondents, agreeing that the insurance policy was reinstated on June 22, 1999. It
had already become incontestable by the time of Felipe’s death on September 22, 2001 since more than two
years had already lapsed from the date of the policy’s reinstatement on June 22, 1999. The RTC noted that since
it was Insular Life itself that supplied all the pertinent forms relative to the reinstated policy, then it is barred
from taking advantage of any ambiguity/obscurity perceived therein particularly as regards the date when the
reinstated insurance policy became effective.

CA affirmed the lower court’s decision with modification that the award of moral damages, attorney’s
fees and litigation expenses is deleted. It declared that there in fact exists a genuine ambiguity or obscurity in
the language of the two documents prepared by Insular Life itself (Felipe’s Letter of Acceptance and Insular
Life’s Endorsement). Insular Life moved for partial reconsideration but this was denied by the CA. Hence, the
present petition.

Issue: Whether Felipe’s reinstated life insurance policy is already incontestable at the time of his death.
Held: Petition is denied

Yes. Respondents maintain that the phrase "effective June 22, 1999" found in both the Letter of
Acceptance and in the Endorsement is unclear whether it refers to the subject of the sentence, the "reinstatement
of this policy" or to the subsequent phrase "changes are made on the policy". Granting that there was any
obscurity or ambiguity in the insurance policy, the same should be laid at the door of Insular Life as it was this
insurance company that prepared the necessary documents that make up the same; and that given the CA’s
finding which effectively affirmed the RTC’s finding on this particular issue, it stands to reason that the
insurance policy had indeed become incontestable upon the date of Felipe’s death.

The Insurance Code pertinently provides that:

Sec. 48. Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this
chapter, such right must be exercised previous to the commencement of an action on the contract.

After a policy of life insurance made payable on the death of the insured shall have been in force during the
lifetime of the insured for a period of two years from the date of its issue or of its last reinstatement, the insurer
cannot prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent.

Section 48 regulates both the actions of the insurers and prospective takers of life insurance. It gives
insurers enough time to inquire whether the policy was obtained by fraud, concealment, or misrepresentation;
on the other hand, it forewarns scheming individuals that their attempts at insurance fraud would be timely
uncovered – thus deterring them from venturing into such nefarious enterprise. At the same time, legitimate
policy holders are absolutely protected from unwarranted denial of their claims or delay in the collection of
insurance proceeds occasioned by allegations of fraud, concealment, or misrepresentation by insurers, claims
which may no longer be set up after the two-year period expires as ordained under the law.

At least two (2) years from the issuance of the policy or its last reinstatement, the beneficiary is given
the stability to recover under the policy when the insured dies. The provision also makes clear when the two-
year period should commence in case the policy should lapse and is reinstated, that is, from the date of the last
reinstatement. To reinstate a policy means to restore the same to premium-paying status after it has been
permitted to lapse. The reinstatement of an insurance policy should be reckoned from the date when the same
was approved by the insurer.

In this case, the parties differ as to when the reinstatement was actually approved. Insular Life claims
that it approved the reinstatement only on December 27, 1999. On the other hand, respondents contend that it
was on June 22, 1999 that the reinstatement took effect.

The court held that the CA did not commit any error in holding that the subject insurance policy be
considered as reinstated on June 22, 1999. This finding must be upheld not only because it accords with the
evidence, but also because this is favorable to the insured who was not responsible for causing the ambiguity or
obscurity in the insurance contract.

Accordingly, the subject policy is deemed reinstated as of June 22, 1999. Thus, the period of
contestability has lapsed.

It must be remembered that an insurance contract is a contract of adhesion which must be construed
liberally in favor of the insured and strictly against the insurer in order to safeguard the latter’s interest.
Indemnity and liability insurance policies are construed in accordance with the general rule of resolving any
ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. Limitations of
liability should be regarded with extreme jealousy and must be construed in such a way as to preclude the
insurer from noncompliance with its obligations.

Insurance contracts are imbued with public interest that must be considered whenever the rights and
obligations of the insurer and the insured are to be delineated. Hence, in order to protect the interest of
insurance applicants, insurance companies must be obligated to act with haste upon insurance applications, to
either deny or approve the same, or otherwise be bound to honor the application as a valid, binding, and
effective insurance contract.